Energy's DC Opportunity, Risk with Schneider

second episode of the podcast, Tim Schneider. He's currently with his own group after being a veteran of the cell side for energy for years. Tim and I first cross paths back when he was with Evercore when he invited me to speak there, and we kept that relationship going through his move back to city. So I think I guess it's my turn, finally way overdue, to return the favor and bring him somewhere. So Tim, welcome, thanks for joining us.

I always wanted to be in finance. So I actually started my first Wall Street job was at at Leeman Brothers, kind of doing some stuff on the on the credit risk side, and then moved over to Deutsche Bank, where I kind of i you know, started as an associate on the oil field services team. Went to City then and kind of this is where I really started to

kicking kicking the attires and the midstream stuff. Then went over to Evercourt to head up their midstream midstream platform, and then the old City analysts left, and then City you know called me and said, hey, Tim, do you want to come come over and head up our energy energy franchise. So I did that at for the America. So came back to city and then recently recently left to kind of start my own firm and look businesses

called the Schneider Capital Group LLC. And it's basically, you know, we're trying to help our customers navigate complexities along the energy value chain and then also trying to identify some

opportunities to unlock and capture value for them. And I really thought it was the time to do this because I'm extremely I don't know if bullish is the right word, but I'm extremely I'm extremely excited to be in a space to be an energy and I'm extremely excited to kind of, you know, look at the next couple of years and kind of see what's coming down the pipe, no pun intended, right, and especially with this new with the energy revolution and kind of what I think is

an all of the above approach going forward. So it's extremely exciting, I think, And you know, we we work with institutional asset managers, private equity firms, infrastructure funds come out of you trading houses, some sovereign wealth funds, and then obviously obviously corporate. So I actually do have Brandon, I do have a hey, I do have my own Twitter wire on Bloomberg now, so if you if you are subscribed to that, you can you can follow my tweets.

And it took me a while to kind of learn the hashtags and the dollar signs and all that, but I got a I got the I got the introduction. So I look, if anybody wants to wants to be put on my distribution list, I post everything on the website for now you can. You can ping me or or or they can go through you. So happy, happy to do that.

coming down this year and maybe looking forward. Just interesting to read about that and then think about what the actual issues are that are making companies change their behavior and change their allocations for resources.

folks in the in the industry. And I think before we kind of get into some of this policy stuff, maybe it'd be helpful for the listeners to kind of convey or at least kind of share with with you my views and what's happening in the in the industry

right now. And I think it's it's it's extremely interesting because you've you've kind of had this, I guess this tug of war, in my opinion, at least between between capital allocation, right I call it, and I kind of call it threading the needle, right, And that's threading the needle between returning cash to shareholders, whether or that is

via buybacks, dividend increases. I actually think debt reduction is part of that equation as well, and then also what I call kind of high grading the company for the future, right And I'm not looking I'm not saying hydro carbon traditional hydrocarbons are going away overnight. That certainly is not

going to happen. But at some point, right, I mean, the the renewable mix for these companies or clean clean mix, well however you want to call it, is going to get is going to get bigger, right, And I think it's it's been difficult. It's I don't envy some of these management teams that have to make these decisions of you know, how do we kind of position ourselves for that? So I actually think there's two things I think that

happened with that. The one thing is I think it potentially sets up a kind of a wave of privatizations, right because I think it's much easier to kind of high grate yourself if you're a private company because you don't really I mean, you don't have to answer shareholders, right. And I think we're actually we saw a couple of privatizations happen. I think this is back in eighteen nineteen.

Those those are altered. There's a couple portfolio companies of large private equity firms, and I think that that's what that's what's happening right now right in terms of how they're positioning themselves. I don't know what their exit strategy is we'll see and I think the other thing that could potentially come come out of this, and I'm not going to get into this in great detail on this podcast. It's a it's a that's a whole new discussion. For another thing is you know, it probably sets up a

wave of M and A activity in the sector. And that's you know, that's either interest subsector called upstream, upstream, midstream, midstream, or if you want to be a bit more i'll call it adventurous or think outside of the box. I do think there's something to be said here for for combining companies along the energy value chain, right, so that would be upstream, midstream, midstream, downstream, or or along those lines.

But it ultimately a lot of this is kind of tied back to how these companies are going to position themselves for for the next couple of years here. And I think obviously this is a that's where you and I are.

For different things? So I'd say in terms of let's let's look at some of the renewable stuff, right, I think in terms of call it rang or renewable natural gas, I think that industry in the US is relatively mature at this point. You know, I'll call it just in terms of the technology, right, alcohol and we can get into that in a bit here how that are how we kind of see that market shape shaving. But you know, i'll give that middle to late innings. I think the

carbon capture and see frustration stuff. There's Robby still some some more with the chop here, but there certainly is you know, there's a lot of companies out there that

have have some pretty ambitious plans. It was actually interesting Exxon just had their earnings call and they certainly they certainly talked about that and then kind of a little a little further along, I'll still call it earlier innings is probably hydrogen althrough ammonia in that as well, But those are kind of you know, those are kind of I would say to three three main buckets at least that we're getting a lot of a lot of questions on, so happy to happy to kind of start where wherever

you want to start. Maybe we'll start with let's see here low carbon fuel standards.

layers from the federal perspective. And then obviously in California, what makes that so lucrative is the credit that you're getting in California and just kind of putting putting some numbers around that. I think last time I checked in California, into subsidy kind of equates to about four dollars per gallon.

Why is that happening in California? Obviously, Look, the state's been relatively I guess i'll call it progressive, and I think, off the top of my head here, I think their goal is to eliminate for California the state's greenhouse guess emissions, I want to say by twenty five. I think that's what they've kind of I think that's what they've put

out there. And look, I think the other interesting thing here is that we came away with in Houston is what other states are potentially going to copy or at least adopt some sort of a footprint that we're seeing in California right now. I think that's interesting from a midstreamer's perspective, because if you already have assets, call it terminal assets or whatnot, in one of those states right now, I'll use I'll use Oregon, Oregon, because that's probably the

furthest along here. There's there's some stuff going on in Washington State as well, but I'm I'm I actually don't know specifically where they are in that process. But I think back back to back to the point I was making, I think it's interesting for companies that have assets in those states potentially because obviously, look, it's a tremendous amount of operating leverage, right, you already have the existing asset footprint, and it just would kind of a cree to the

bottom line in my opinion at least. But look, I think at this point it's probably I don't think people are really discounting it. So actually curious have you guys spent a lot of time kind of kind of looking at that what's going to happen with with some of these different.

they actually forcing changes in the dynamic? And that's what we're focused on right now.

You know, I mean they have a what's the backlog I think to over three billion and the implied the implied, and so that that's not all going to be renewables, right, but it's you know, I think they kind of bucketed as eighty percent towards carbon reduction or whatnot, but there certainly is some some capex in there for renewable natural gas and so forth. But look, I mean they're saying they can bring that backlog online that kind of you call it three and a half three and a half times.

So I think that that obviously is you look at traditional midstream returns typically call it you know, I'll use a range of six to eight times on EBITDA. And I think what's been interesting. I don't know if you saw the the article that just came out on BP, because BP really had been had been the penalty box a little bit, I'd say, because investor, because then obviously they've made this huge push into renewable, right, and I think investors are We're kind of questioning is that really,

you know, are the returns going to be there? And is there really basically could you be using your capital for for something else? And the article I'm referring to is basically the I think it was a CEO and I only read the you know, glance to it briefly, you know, kind of maybe shifting away a little bit from the UH from this ESG driven I guess i'll call it investment agenda and more kind of focusing on

their bread and butter hydrocarbon business. So I thought that I thought that was interesting just in terms because you brought up the UH, the whole topic of returns on some of these projects.

Solutions Group or something like that. Then really kind of you're marking funds for that, right, so you kind of have you have these different buckets and you kind of have to address all of them. The other thing i'd i'd say from a from a from an energy infrastructure perspective that I think is gaining gaining some momentum here is if you call it, call it twenty twenty twenty twenty one, that was a period of time where these companies really had to get obviously the depths of COVID

here had to get their balance sheets in order. You know a lot of them, a lot of them cut their cut their dividends. An investor, all the investors wanted to see is really, you know, just give me the money coming out of COVID, right, buyback stock, increase the dividend. I think, now if we're kind of solving towards the lowest come denominator here, right, and this is cash flow allocation, I think there's something to be said here for a company that had that has all that plus an interesting

kind of growth angle. Right, And I think this is again where you know, so some of these some of these legislative things or somebody you know call it renewable natural gas, carbon sequestration, low carbon fuel standards. I think if you have, if you have an angle on that, I think that is something that certainly can be a differentiating factor. When you're kind of telling your story.

those front and center. I'd say, from a you know, from an investment opportunity right now, immediate from a you know called an energy infrastructure company, that market probably at least if I kind of look at the companies I'm looking at, is probably a little bit further out right.

I mean, I mean that there's some I think that a lot of the companies are still trying to figure out what actually what actually happens to our pipeline when we move hydrogen molecules through the through the pipeline, right, Because it's it's obviously a tiny it's a tiny molecule, and you know there's some potential integrity issues with that. But certainly i'd say in the general media again that

hydrog pnemonia gets the most attention. I think in terms of near term opportunity, i'd probably stack up renewable natural gas is probably the one where there's the most kind of near term opportunity. I preay threw in, you know, call it renewable diesel in California. I throw it in there as well. And obviously in terms of economic impact, the other thing, I mean, the one that's that's really

interesting here is obviously carbon capture and sequestration. Right if you kind of look at the tax credits or the incremental I guess the incremental benefit coming out of the Inflation Reduction Act. I think that certainly has increased economics for for a lot of projects here, and I think there certainly is companies pivoting towards that. Excellent made an interesting comment on that the car hole carbon capture thing in their in their earnings call here last week actually

this week. I'm sorry, I'm getting my getting my days confused, and that was it's not you know, carbon capture is not a game for startups, right, It's going to require a ton of capital that you have to be willing

to put behind. Obviously, there is you know, there's still is some regular some regulatory delays, right because you need to in order to get the carbon in the ground, you obviously need to have a Class six well permit, and that right now is going through the e p A. It's so, I obviously I've never filed one, but the feed by the feedback from.

is a little bit further along than Texas. But I actually don't know what that would do to the timeline in terms of getting one of these walls wells approved. Curious if you guys have looked at that.

I think that's class one. All these different classes of wells, they are administered by the states because at one point they applied to EPI. EPA said, you have the expertise here, we agree, so you can do the permitting. So right now, North Dakota and Wyoming are approved. They are the only two states that are approved for carboncy questration wells permitting programs.

Louisiana has been pending for like over six hundred days, and Texas, West Virginian, Arizona are all in the so called pre application stage, which is just you know, government regulatory speak for first stage of application. But you know it took North Dakota eighteen hundred days to get approved,

so these are not moving quickly. And that I think, as a separate conversation outside of the scope of this podcast topic, I think discussing that is a looming problem for all of these projects there now being you know, people are rushing to throw money at them, but they don't necessarily have these wells on a large scale basis that can be permitted yet.

the coal industry. I mean that is what the call it, forty eight billion cubic feet a day or so, natural gas power about thirty billion cubic feet a day or so, then kind of drops off and you know, refineries nine, men production four and then there's a bunch of others.

But obviously there is there's a big opportunity set and I'd say you know it just in terms of of CO two infrastructure, I think obviously if you do have existing pipes, I think Kinder Morgan actually I want to say it's the largest CO two pipe, But don't don't quote me on that court.

over one hundred. I'm almost positive, I think. And that's that's the power of throwing money at something, right, is because the Inflation Production Act, basically from my perspective in DC seemed to surge projects and not and so suddenly you got a bunch of baler g export terminals that are trying to get off the ground, get approval, get over that final hump with FURK the Federal Energy Regulatory Commission, and the ones that were in a little bit of

trouble start adding carbon capture as a mitigation measure, because you know, it helped kind of reset the balance for them on the analysis of the cost benefits and looking at like environmental justice for surrounding communities, whether they were disproportionately impacting various communities that are disadvantaged and typically religie that means not just really land use, but more like potential emissions, and so having carbon capture there was a

huge add on. But not just that it's the potential revenue generator now, which is kind of a wild thing to think about.

is sticky. Right, So as a as you're kind of looking as an energy infrastructure operator, you're kind of looking at your call it your portfolio of you know where you can because you only have a finite amount of money, right, And I think obviously you know the whole renewable natural gas, low carbon fuel standards, all that stuff. I mean, it's great, right, I mean, just I'll give you an example here. Let's

look at renewable natural gas kind of demand markets. Right, Let's look at a transport transportation market, right, so you're selling let's call it gases. Actually, don't do not have my bloom work up, which is funny on the Bloomberg podcast. Right, let's say natural gas right now, is you call it three three bucks, but you're adding obviously as you're selling that. As you're selling that, you're getting the rint credit, right, And that is the most relevant one here is probably

the D three rent. And again don't have my bloom work up. You can look this up on Bloomberg. They do have the WRINT pricing on there. I think last time I checked it was close to call it twenty seven dollars, right, So that turns a three dollars molecule

into a thirty dollars molecule. And that's interesting. However, I mean WRINT prices obviously are can be extremely balad well, right, so as you're kind of allocating, as as you're you know, let's let's say an energy infrastructure company, you don't really want that or you don't you don't love that variability of cash flow, right, that volatile, I mean, because your whole investment thesis had always been we have we have

city city cash flows. Now look, I mean the opportunity set obviously is I mean, the returns you're getting on that is is pretty impressive. So you'll you'll take the volatility. But just in terms of more visibility, you probably have more visibility on cash flow on something on the carbon

capture side. And this is this is where where the question the question I had for you, do you think there's ever any risk to those carbon credits, those tax credits being being repealed or lower if they were changing the administration or do you think once it's in there, it's sticky.

process with a little more certainty. And then at the same time you're trying to gradually push you it's technology forcing, right, So you're forcing towards a greener fuel set, or you're forcing towards better limitation of emissions in some way, And

so I think both sides can get behind it. It's just the only people who might not like this over time are the ones who are looking at and saying, you're paying a pipeline, you know, eighty five dollars a ton for twelve years guaranteed without taking into account what they're making on the product that they're shipping. So that feels like a lot of money. I mean, these are clearly these are very capital intensive projects, so it's going to be there's a high cost there, so you have

to offset that. And we probably wouldn't have had you know, these Midwest pipelines popping up being proposed, but for these credits out there, I mean, they just don't don't make sense in the structure that they're built at it right now. So so you definitely need that level of funding. But I think, you know, I do think it's pretty low risk that these disappear over time.

let's call it. You know, dry gas production in the US isn't as you know, I like round numbers called one hundred cubic feet to day. So renewable natural gas production is you know, it's a low single digit percentage of that, so it's not huge. There's going to be a lot of growth, but it's off a low base and you know, well it gets uh you know, call it five ten b's over the next decade or so

maybe who knows. And I think there is you know, it's a nice supply source for someone who has access to that because unlike shale, you have you know, there's a lot of visibility just I mean you don't have to keep I mean the garbage keeps coming in, right, so and it's keep. Well, it's it's funny, right, it's

actually not not every landfill is a good landfill. You you ideally want one that's in a high population area because there's a lot of there's a lot of organic matter that gets thrown out obviously, you know, food scrapes and that. You don't want landfill that has you know, rocks and I call it whatever industrial stuff in there. And just on that, I think there's about twenty five hundred landfills.

I'll throw some numbers at you in the US and just for scope, I think thirteen percent of those of that landfill gas right now is kind of converted into renewable natural gas, and I think over half of these landfills or just underhalf, don't even have the infrastructure. So look that there certainly is capital. And it's not just landfills, right, I mean, there's dairy digestors and whatnot. There certainly are

capecs dollars that can be spent on that. But ultimately, I think the big, the big dollars are really going to be gravitating towards carbon capture and sequestration and then again hydrogen pneumonia.

natural gas space. In the renewable natural gas space as well, but it'll be interesting to kind of see what happens with some of these private companies going forward, so.

a different way as well. I'm wondering what your thoughts are in terms of like policy risks, UH, specifically for midstream and energy infrastructure generally, what do you think, at least from what you're hearing or just you personally, what do you think are some of the bigger policy risks for the near term.

it's intrast state, it's not interstate. But if you have a big kind of trunk line natural gas pipeline network, I mean, no one is going to come in there and build a pipeline next to you, because you know they'll they'll I mean, it's it's never going to get approved, right, So so it's basically I mean the replacement value of steeling the ground. I mean, it's actually a really interesting topic because because those assets can't be replicated. But let's

just assume permitting is what it is. I mean, maybe it gets worse, it definitely doesn't get better. I mean just from a from a risk to cash flows. I mean, i'd say, or just just across the entire energy kind of value value chain, and I think any kind of sort of export ben obviously wouldn't be obviously obviously wouldn't be wouldn't be great. Now I don't I don't see that.

I don't see that happening. I mean, it does does pop up every now and then, right then, and news media, i'd say, you know that there there were some talking points last year. I remember writing about this at my former employer around you know, the tax structure, tax treatment

for for master limited partnerships specifically. But I haven't I haven't followed it super closely since since since I left, But I guess any sort of any sort of kind of windfall tax which I look, I mean, we I think I think that just went through in Europe, right, And it's kind of it's actually it's funny because it really is achieving the exact opposite of what you want, right. I mean, you you want more production because you want

people to have reliable supply. You want people, you know, be able to heat your homes and not have to live paycheck to paycheck to do that. So I don't think that's where that's going to happen in the US, but obviously Europe your's a little different. But I'd say I can probably noodle over a couple more about a gun to my head. I think that's kind of what popped up.

to come to the table. That's a cynical view of DC, which is probably the right one. But I don't, Yeah, we agree. I don't think there's an export ban that gets put on the table. The geopolitics, particularly with how things are right now in Russia Ukraine. I don't think the US can do anything to minimize exporting any of their commodities. Just too many allies relying on it right now, and pricing would go crazy. Obviously, you know that as well as anybody. So I don't I don't see that

happening other than just sort of yelling. There's there's a lot of yelling in DC, and I think that that might be one of them, but that never comes to fruition. Permitting is more interesting because we've had some proposals, right, We've had some things thrown out there. Centator Mansion. It's

really what he wants to get done. But you know, that's not been the way that the GOP leadership wants to go because it wasn't done in it by bartererson manor now there's some news out I think even just today on Bloomberg about rumors around permitting reform and is it back, does it come back? You know, we think the only way it gets done is if the GOP

leads and mansion gets behind it. The problem really, I think for midstream and ellen g which is really I think probably the two key pieces of infrastructure type that we think about when we think about permitting issues. Although I'm sure others would feel the same way in the chemical space. But the problem is for them is that the reforms that are being proposed are really just in the margins. They don't get at the issue, which is

that the underlying statutes problematic. It's the environmental reviews have expanded, They've doubled the time over the period of like four years, and so it's an interesting time I think for energy permitting, particularly midstream, because that permitting reform won't do much. But on the other hand, Furcus right now is that two

to two in a split. They're supposed to be five commissioners generally, and we're at two two because one his term is up and there hasn't been somebody reappointed yet and the current chairman Commissioner Phillips is pretty moderate and seems to our opinion is that this will move some projects along faster in this period than we've seen in

the last four years. And so those projects that are in sort of the intermittent stage where they're waiting on approval but have already applied, like I think Williams, like their regional energy access project that's a big deal for Transco, that one just got its certificate in January. I think we're going to see that kind of movement at least in the next six months, just because of the way FERGUS is set up. And then once potentially once we get past six months, we'll see a full compliment and

then firks, you know, dynamic shift again. Who knows, but it's sort of a it's the first time we've seen some optimism in the space on the regulatory side. But I think overall the package of obstacles that these projects face is still pretty robust.

three years. And that what an URN is. It's basically you're selling renewable natural gas RNG basically in the power market, right, and that that is then going to be used to charge electric cars. So it's kind of, you know, it kind of fits that whole called it renewable renewable energy value chain, I think, and you probably know this better than me. I don't think the regulations are finalized yet.

I think they should be mid year, but that could be I mean, that could be another I guess I'll call it shot of a shot of adrenaline for the renewable natural gas market for lack of a better term.

That's a good that's a good spot. I think tim to cover us for the substance a portion we're you know, we have a long history of this. Now our second episode of finishing with an off topic question here. I think the last one my colleagues asked Mick mulvaney what album three albums he would use on a need to have with him on a desert island. I would ask you something slightly different, which is, if you were stuck on a desert island, heaven forbid, would you want a

movie with you? One single movie? What would you want an album? Oh?